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TMFBro (< 20)

Last week's predictions roundup



August 10, 2009 – Comments (0)

While I will try to post these on Friday, I was at a conference over the weekend. So here it is, a few days late, an eclectic collection of people who have an opinion about what the future holds.

The Encouraging

Scott Grannis thinks equities are still a buy: "Equity prices are up about 50% from their March lows, but equities are still very, very cheap when compared to corporate profits and the level of interest rates. Technical indicators may call the current market "overbought," but this model suggests that equities are still suffering from a severely "oversold" condition when one considers the valuation fundamentals. The gap between theoretical and actual valuation, according to this model, says that equities today are worth about half of what they should be worth. To close this gap, interest rates could rise to 7.75%, or corporate after-tax profits could decline by over 50%, or equity prices could double. Or we could see some combination of much higher interest rates and lower after-tax profits."

Mark Perry points out that betters are betting on recovery: "Back in early March, the Intrade odds of positive economic growth in the U.S. for the third quarter was only 25%. Those odds of positive real GDP growth in Q3 have recently risen to 90%, as many economic indicators now point to an economic recovery and positive growth this quarter (July, Aug., Sept.)."

Mark Zandi tells the Voice of America that a rebounding housing market is key to a recovery: "I think it's a necessary condition. I don't think the financial system stabilizes nor does the economy gain traction unless the housing downturn comes to an end. And I think it is coming to an end."

While not a 100% encouraging statement, any kind of positive statement from Nouriel Roubini -- who says there are signs that global economies may be bottoming -- is noteworthy: "There is potentially light at the end of the tunnel, and advanced as well as emerging economies are showing signs of bottoming out of recession, but there is the risk of a double-dip recession in the second half of next year and into 2011."

The Discouraging

According to Bloomberg, Barclays doesn't think home prices have bottomed: "While an S&P/Case-Shiller index for May showed the first month-over-month price increase since 2006 and a 2 percent seasonally adjusted annualized drop, a more-accurate reading probably would have been an annualized decline of 10 percent to 15 percent.... Data reflecting a reversal of the seasonal benefit, as well as 'a tide of new foreclosure sales' as a moratorium on the seizing of homes put in place by banks subsides, will lead to 'renewed weakness' in the fall, they said.... They project that U.S. home prices will fall an additional 11 percent on average before bottoming next year, bringing the total decline to 40 percent from their peak."

Mark Hanson also thinks housing has farther to fall: "Every year, organic sales fall off of a cliff beginning in August primarily because kids go back to school in Sept. If organic sales follow typical seasonality trends lower again this year and foreclosure-related resales stay the same or rise (no reason they shouldn't), then the average and median prices will be pulled quickly back towards the distressed market price."

John Lounsbury thinks the most likely outcome is that our future will look like Japan's past: "My view is that the future will hold an experience that will probably have a mixture of flavors from many historic cuisines. I give low probabilities to a repeat of the Great Depression, as well as 'V' shaped recovery to sustained 3%+ positive GDP growth. Something like the Japanese experience of the past 20 years has a higher probability."

Joseph Stiglitz
also mentions Japan, and warns of a rocky road: "It would be a mistake to say, because we are out of the freefall and that we may have turned the corner, to say, well, we’re on the road to recovery. Remember, Japan turned that kind of tide, and it was years before they returned to normalcy. In the Great Depression, there were many periods when the corner was turned, and it turned down again…. I think there is a serious risk of an extended malaise and negative bumps along the way."


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